Mexico Awards Contracts to Secure Renewable Energy

Electricity auctions drive fierce competition and push prices down

A worker drove past wind turbines at the Comisión Federal de Electricidad wind farm in La Ventosa, in the state of Oaxaca, Mexico, in 2013.
Photo:
Bloomberg News

By

Anthony Harrup

Sept. 28, 2016 2:19 pm ET

MEXICO CITY—Mexico’s opening of its electricity market after decades of state control is driving fierce competition among suppliers of clean energy and pushing prices down, as renewable energies gain traction across Latin America.

Mexico’s government, following the launch this year of a wholesale electricity market under an independent system operator, this year held its first auctions in which companies made bids to sell renewable energy under long-term contracts to state-owned utility Comisión Federal de Electricidad, or CFE, starting in 2018.

On Wednesday, purchase contracts were awarded for 8.9 million megawatt hours a year of electricity from mostly solar and wind generating plants—equivalent to about 3% of Mexico’s current electricity use. A megawatt is enough power to run about 1,000 homes.

The average price, at $33.47 per megawatt hour, was well below the $60 maximum price set by CFE, the country’s biggest electric company and the only one that provides public service to homes and other small users. It was also below the $41.80 per megawatt hour secured at a first auction in March.

The CFE was the only buyer in the first two auctions, although large electricity consumers such as industries are expected to participate as buyers in future auctions beginning in 2017.

“This is good for Mexico. Two of the main goals of the electricity reform are to bring electricity prices down and enhance Mexico’s clean fuel generation, and by those standards I think the auctions have been a success,” said
Gabriel Salinas,
a partner at international law firm Orrick Herrington & Sutcliffe LLP, which represents companies in the auctions and other areas of the Mexican electricity sector.

Clean energy is making inroads elsewhere in Latin America.

In August, Chile awarded contracts to deliver 12.4 million megawatt hours a year of mostly wind and solar energy over 20 years beginning in 2021. The country plans to call auctions for an additional 19.9 million megawatt hours over the next few years. Average prices in Chile were $47.59 per megawatt hour, 63% below its previous auction.

In Argentina, bids to build plants with a capacity of 1,000 megawatts of renewable energy were more than six times what the government is seeking, which raises the possibility that more will be assigned when the auction results are known in October. Argentina aims to have 10,000 megawatts of renewable energy by 2025, accounting for a fifth of its power generation.

Mexico, an oil producer, has mostly relied on natural gas and other fossil fuels to fire its electricity sector. But technology is driving down the cost of renewable energy to the point where it can compete on price with natural gas-fired plants.

“The prices are surprisingly low in Mexico, and the level of interest is still high,” said
Sergio Pozzerle,
a partner at global law firm Sidley Austin LLP who has been active in the power sectors in Mexico and South America.

Mexico generates about 20% of its electricity with clean energy, including hydroelectricity and some nuclear power, and aims to raise that to 35% by 2024, with intermediate goals of 25% in 2018 and 30% in 2021.

While wind farms have been operating in the country for years, the amount of solar power has been negligible. Now, the two technologies are competing directly to supply energy at the best prices. Solar has been the big winner in Mexico’s auctions, claiming 74% of the contracts in the first and 54% in the second. Wind power was second.

“Without a doubt, the price of solar energy has come down a lot lately because of technology. Wind power costs have come down at a slower rate, and will continue to fall at a slower rate,” said
Rafael Mateo,
chief executive of Spain’s Acciona Energía, which has won contracts with wind projects in Mexico and Chile and a solar project in Mexico.

The best thing is for the two to complement each other. “I think a system can’t just rely on one or the other,” Mr. Mateo said.

Mexico's Electricity Deputy Minister César Hernández (center), shown in April, said leaving it up to the market to compete and decide what technologies to offer proved to be the right decision.
Photo:
Bloomberg News

César Hernández,
Mexico’s deputy minister for electricity, said leaving it up to the market to compete and decide what technologies to offer proved to be the right decision.

“If we had made that decision from the beginning, from the bureaucracy, the solar basket would have been very small, because the competitiveness of that technology wasn’t clear,” he said. “We didn’t know that, and the auction helped us discover it.”

Companies that won contracts in the Mexican auctions are expected to build about 5,000 megawatts of new clean energy-generating capacity with investment of around $6.6 billion.

The government estimates that Mexico will require investment in electricity of $131 billion between now and 2030, including $15 billion in transmission lines, which for the first time will be allowed with private investment.

Mexican officials see other incentives for suppliers in the size of the economy, growth prospects, and the fact the private wholesale market is in its infancy.

Mr. Salinas of Orrick noted that the auctions have drawn not only generating companies, but also manufacturers of equipment.

“The line between a supplier and a generator is not as clear. I think now we’re talking about being in wind, or solar, or geothermal. There seems to be more of a competition between technologies than between different types of players,” he said.

One example is California-based
SunPower Corp.
, which won about a quarter of the solar contracts awarded by CFE in March. The company said last month that it plans to transfer its solar panel manufacturing equipment from the Philippines to its existing plant in northwestern Mexico to “optimize our supply chain and move final panel assembly closer to our key markets.”